FedEx Corporation (FDX, Financial) provides a portfolio of transportation, e-commerce and business services under the FedEx brand. The company’s primary operating companies are included in four business segments: Federal Express Corporation (accounted for 60.7% of 2013 revenues), a transportation company; FedEx Ground Package System Inc. (23.6), a North American provider of small-package ground delivery services; FedEx Freight Inc. (12.1%), a North American provider of less-than-truckload freight services; and FedEx Corporate Services Inc. (3.6%), which provides sales, marketing, information technology, communications and back-office support.
In this article, let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment opportunity.
Innovations
FedEx Express has opened a new North Pacific Regional Hub in Osaka, Japan, and a new national hub in Mexico, with an investment of $48 million. The new facility in Cuatitlán Izcalli in the State of Mexico will be the “centerpiece” of domestic operations for FedEx Express in Mexico. The new hub will perform domestic operations and reduce transit times, enhance pickup services and foster efficient deliveries throughout Mexico. Recently, the firm open a new container freight station in its Chicago Summit, III, facility to consolidate and sort freight bound for Puerto Rico. Furthermore, it expanded its SenseAware service availability in Canada, in order to increase the existing market.
Higher Shipping Rates
Higher rates for 2014 include a 3.9% hike in shipping rates at FedEx Express for U.S. export and import services. Moreover, FedEx Freight increased the shipping rates by an average of 3.9%. At the end of last year, the company also hiked shipping rates for FedEx Ground and FedEx Home Delivery by 4.9%. Finally, it also introduced FedEx One Rate a flat rate shipping system for individual shippers and small business entities, which gives U.S. customers a simple, predictable, flat rate shipping option for their express packages and is backed by the FedEx Express money back guarantee.
Two Contracts
The company has won a two contract. One for $171 million from the U.S. Department of Defense for small package delivery services for the military. The other one was a defense contract worth $49.8 million for overpacking and transportation of perishable products for the Defense Commissary Agency and Defense Logistics Agency. Both contracts will expire on Sept. 30, 2014.
Analyst Recommendation
The firm is currently Zacks Rank # 3–Hold, and it also has a longer-term recommendation of “Neutral.” A Hold rating indicates that the stock, over the next one to three months, will perform at an annualized rate of 10.56%, which is very similar to the one projected for the S&P 500. For investors looking for a better Zacks Rank Avianca Holdings S.A. (AVH) could be the option.
Relative Valuation, Earnings and ROE
In terms of valuation, the company sells at a trailing P/E of 25.2x, trading at a premium compared to the industry mean. Earnings per share (EPS) have increased by 8.8% in the most recent quarter compared to the same quarter one year prior.
Last year, it reported earnings of $4.92 versus $6.41. This year, Wall Street expects an improvement in earnings ($6.68 versus $4.92).
In the next graph we include the stock price because EPS often lead the stock price movement. As we can appreciate in the chart, the price performance showed an interesting upward trend in the last five years.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has decreased from the same quarter one year prior. This is a clear sign of weakness within the company.
Let´s compare the current ratio with the peer group in the next table:
| Ticker | Company Name | ROE (%) |
| FDX | FedEx Corp | 8.97 |
| AAWW | Atlas Air Worldwide Holdings Inc | 7.12 |
| RLGT | Radiant Logistics Inc | 23.12 |
| UPS | United Parcel Service Inc | 67.53 |
FedEx has a low current ratio of 8.97% which is higher than the one registered by Atlas Air Worldwide Holdings Inc. (AAWW, Financial), but lower than Radiant Logistics Inc. (RLGT, Financial) and United Parcel Service Inc. (UPS, Financial).
Final Comment
As outlined in this article, FedEx is a growing company and we expect to continue in that way due to the initiatives we have analyzed that substantially will contribute to the company´s earnings power over the next several years.
I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in the first quarter of 2014. Ken Fisher (Trades, Portfolio) has bought it in that time frame.
Disclosure: Victor Selva holds no position in any stocks mentioned.
